Real money talks. It says the oft-repeated meme about Fannie Mae and Freddie Mac—that they ran a, “failed model of private gains and public losses that once forced taxpayers to write a $188 billion bailout check”—is a big fat lie. If I wrote the Fact Checker column for The Washington Post, I would assign four Pinocchios to the above quote by Sens. Bob Corker and Mark Warner. The claim is indefensible because the so-called losses, which triggered the so-called bailout, were bogus. Those massive non-cash accounting provisions, booked for fiscal years 2008-2011, were reversed by the end of 2013. Absent those illusory losses, the Hank Paulson charade bailout of both companies would have approximated zero. Which is why the GSE business model never, “forced taxpayers to write a bailout check.”
"To see what is in front of one’s nose needs a constant struggle," wrote George Orwell, who aptly described the litigation surrounding the Third Amendment to the Senior Preferred Stock Purchase Agreement, under which the Department of Treasury purchased $187 billion in equity to "bail out" Fannie Mae and Freddie Mac.
What’s in front of everyone’s nose is that a conservator drained a quarter trillion dollars in equity out of two undercapitalized corporations. To anyone who ever completed a course in accounting or corporate law, what is in front of everyone’s nose should be easy to figure out. The cash dividends, which drained $250 billion out of Fannie and Freddie, were patently illegal.
In 2011, The Washington Post published "The Big Lie goes viral," by Barry Ritholtz, who refuted the popular myth that affordable housing goals imposed on Fannie Mae and Freddie Mac were a central cause of the financial crisis. But, like an ever-tenacious virus, a Big Lie keeps mutating, as evidenced by a Post editorial, "This Fannie-Freddie resurrection needs to die."
Denying the impact of derivatives
If you ever doubted that Douglas Holtz-Eakin is a shameless hack, read what he wrote in an R Street Policy Study titled, "Sizing Up The FCIC Report Five Years Later." His perversions of history would have embarrassed Kurt Waldheim.
"Fannie and Freddie are doomed according to the Washington way of thinking about it," said Peter Wallison. "We’re going to get rid of them somehow, so why even bother thinking about things like this." Wallison, from the American Enterprise Institute, addressed a conference hosted in September 2013 by a newly launched conservative think tank at NYU Law School. The panel discussion was titled, "The Reorganization of Fannie and Freddie."
Wallison mentioned "things like this" in reference to the legal claims asserted by GSE shareholders, who argued that a revision to the Senior Preferred Stock Purchase Agreements, the notorious Third Amendment earnings sweep designed to drain all corporate equity by way of cash dividends to the U.S. Treasury, was illegal.
"The content of this report, in my view, cannot be legitimately questioned,” said Rep. Richard Baker (R–La), who cited the imprimatur of a Big Four accounting firm. “Utilizing the firm of Deloitte & Touche and the staff of OFHEO [Office of Federal Housing Enterprise Oversight], the director's report is delivered after review of over 200,000 documents and e-mails, as well as hundreds of interviews and depositions of current and former staff of Fannie Mae,” he said. The hearing he convened on October 6, 2004 was titled, "The OFHEO Report: Allegations Of Accounting And Management Failure At Fannie Mae."
Sooner or later, a litigator sits down with his client to explain why a negotiated settlement is preferable to trial. All litigation is a crapshoot and corporate defense lawyers are expensive. At the end of the day it doesn’t really matter who is right and who is wrong. What matters is the price you pay to walk away from a lawsuit and get on with your life.
Stubborn or principled?
But White House officials played a unique role in the decision to impose the Net Worth Sweep, and this fact cannot be seriously disputed in light of the materials attached to the plaintiffs' motion...As this Court has already observed, "[h]igh-ranking officials within an agency, corporation, or other institution are not fungible," [.] and the communications of such officials are not fungible either.Otherwise, the law firm made a very compelling case against the government's assertion of the Deliberative Process Privilege and the Bank Examination Privilege. One sure bet, the government won't accede to the requests for additional information without a fight.
- There is no reference to GAAP or
- There is no reference to footnote disclosure versus balance sheet treatment;
- In other words, the report is never explicit about how and where the debits and the credits were misplaced. And without such information, it's very hard to figure out what the GAO is talking about without further fact checking;
- There is no mention that KPMG and the CFTC OIG are the gatekeepers, the parties primarily responsible for assuring OMB and the GAO that the CFTC presents its numbers properly; and
- Since the report never references the footnotes, it's still virtually impossible to figure out who, if anyone, could possibly be misled.
So far, my assessment, below,
Last month KPMG made three serious, and patently false, charges against its client, the Commodity Futures Trading Commission. It wasn’t happenstance. Employees at Big Four accounting firms like KPMG do not suddenly go rogue. So you have to wonder, who pressured KPMG to invent these defamatory smears? It sure looks, sounds and smells like if was the CFTC’s Office of Inspector General, working in tandem with some Republican Senators.
Pictures Of The Crisis: Timing Is Everything
In the spirit of show, don't tell, this week is about visual enhancement, using charts to place familiar concepts into a broader context. For many this is old and familiar news; for others the info might be fresh.
Right away the charts tell you what every real estate lender knows: (a) Location, location location; and (b) Timing is everything. The point in the housing cycle when you booked the loan drives your recovery. Or more specifically, home price appreciation, positive or negative, post-closing drives loan recovery more than any other factor. This has been especially true for subprime loans.
[Previously posed on 1/17/16 but lost in the shuffle to a new website host.]
Michael Grunwald neatly summed up his takedown of The Big Short in Politico with this observation: "[Y]ou can’t blame the Dutch tulip craze on synthetic CDOs." By invoking the Dutch tulip craze and other empty platitudes, Grunwald presents an analysis that fits squarely into the Stuff Happens school of economic thought. "As with the tulips and most financial crises, the basic cause was a highly leveraged investment mania," he says. Everybody, "took advantage of easy credit—fueled by low interest rates and what Ben Bernanke has described as a 'global savings glut.'" This stuff just happens, right?
The $187 Billion Fannie-Freddie Bailout Is a Big Half-Lie
4 Dec, 2016
Oral Arguments in Perry Capital v. Lew Devolved Into Nonsense
11 Jun, 2016
Washington Post Editorial On Fannie And Freddie Is Based On Two Profoundly False Assumptions
7 Jun, 2016
Douglas Holtz-Eakin's Whoppers About Derivatives, The Crisis And The FCIC
25 May, 2016
Unsealed Court Documents Reflect Upon The Government's Plans for "GSE Reform"
21 May, 2016
Are Hedge Funds "Corrupt" When They Pay Lobbyists To Push A Pro-GSE Agenda?
15 May, 2016
Fannie’s Regulators Have Been Lying For Over A Decade
16 Mar, 2016